Greenspan Urges Attention to Market Liquidity,
Fragmentation

April 13, 2000 (PLANSPONSOR.com) - Central banker
Alan Greenspan Thursday suggested policymakers allow the
proliferating financial exchanges to centralize, because "in
times of stress, liquidity simply may not be there or it may
not be there in depth." But he expressed doubts about the
wisdom and technical feasibility of forced
centralization.

The comments of Chairman of the Federal Reserve Board
appeared in testimony prepared for April 13 Senate Banking
Committee hearings. The hearings were called to examine the
effects of market fragmentation on market efficiency and
investor protection.

Following prepared remarks, the Senate committee invited
Greenspan to comment on whether the government should
centralize trading venues such as NASDAQ and the New York
Stock Exchange for cheaper, more efficient trading. “It has
never proved wise for policymakers to try to direct the
evolution of markets, and it strikes me as especially
problematic at this juncture,” Greenspan said.
However, he noted he was “expressing my own views and not
necessarily those of the Federal Reserve Board.”

Behind the curve

“Given the pace of change in our markets, it is
difficult to contemplate how a government mandate could be
implemented” that would centralize and link exchanges and
trading networks, Greenspan said. “Systems might well
be obsolete before we were half-way through the planning
process.” The recent and explosive growth of
electronics communications networks (ECNs) have expanded
trading options and hours for investors, but within certain
limits.

Still, having too many trading venues could mean “not
all orders to buy and sell securities necessarily have the
opportunity to interact with one another,” Greenspan said.
He said fragmentation “raises questions about quality and
completeness of the price discovery process and concerns
that investors’ orders to buy and sell securities may not
be executed at the best price or the lowest cost.”

Caution

Greenspan found the potential lack of market liquidity
“worrisome…particularly in times of stress” and cautioned
institutional investors to “better assess the possible
consequences of market illiquidity.” Greenspan
expressed doubt about whether current equity trading
systems had been fully tested for their resiliency under
extreme conditions.

Large Wall Street brokerage firms like Merrill Lynch and
Goldman Sachs favor a centralized stock order book.
But the New York Stock Exchange and the NASDAQ Stock Market
claimed this would reduce competition and
innovation.